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A year off-script

While the numbers definitely show that the Indian M&E sector has gone off-script in terms of its growth trajectory, the time is ripe for reflection, recalibration, and a subsequent revival.

The tepid economic growth combined with slowdown in domestic consumption had a material adverse impact on the Indian media and entertainment (M&E) sector, which grew at slower rate of 7.4 percent in FY20, to reach a size of `1.75 trillion, at a CAGR of 10.3 percent over FY16–20. While the slowdown negatively impacted print and to an extent, TV advertising, digital, and gaming segments continued to grow at a rapid pace and positively contributed to the performance of the sector.

March 2020 also saw the country start to see the impact of COVID-19 and head into a long phase of lockdown. This has had an ongoing adverse impact on the economy across sectors with supply chains, manufacturing, consumption, income levels all getting impacted.

The M&E sector has also been significantly impacted, particularly with all forms of outdoor entertainment coming to a standstill, a significant slowdown in advertising spend and content supply chains breaking down. As a result, the M&E sector is expected to contract by a significant 20 percentage points in FY21 with major segments like TV, films, and print all seeing major declines. On the other hand, extended lockdown is accelerating digital consumption and segments like digital and gaming are seeing rapidly growing user penetration and engagement levels. The M&E sector is expected to bounce back in FY22 with a growth of 33.1 percent over FY21 to reach a size of `1.86 trillion, at a CAGR of 3.2 percent over FY20–22, with gaming and digital being the fastest growing segments.

The Indian M&E sector grew at a rate of 7 percent in FY20 to reach a size of `1.75 trillion, a CAGR of 10 percent over FY16–20. At the same time, owing to the slowing economy and the impact of COVID-19 at the end of the year, the advertising revenue growth was estimated at 3 percent in FY20, with the advertising revenues reaching a size of `726 billion by FY20.

The growth in overall revenues was driven by digital and OTT video, which registered a growth of 26 percent in FY20, albeit lower than the earlier estimates. Television continued to be the largest segment both in terms of overall and advertisement revenues and had a reasonable year with a 9 percent growth in overall revenues in FY20.

This was majorly driven by the growth in subscription revenues post implementation of NTO 1.0 and Q1FY20 seeing strong traction in advertisement revenues. The films segment was flat, while Print, OOH, and radio saw a decline in overall revenue in FY20.

Underlying drivers for FY20 performance
Digital and OTT video. Robust growth in digital infrastructure and content supply allowed the digital segment to post a 26 percent growth in FY20 despite a slowing economy, with digital and OTT advertising growing by 24 percent. Digital subscription continued to grow strongly at 47 percent in FY20 on the back of growing user acceptance though there was some resistance due to the combined factors of OTT video players increasing their package prices and the income effects of a slowing economy.

Television. The television segment witnessed a growth of 9 percent in FY20 on the back of higher subscription revenues triggered by the implementation of NTO 1.0, which resulted in transparency across the value chain and higher ARPUs due to implementation of a minimum NCF. However, advertising growth in FY20 was tepid, with a sluggish economy and impact of COVID-19 at the end of the year, apart from Q1FY20.

Animation and VFX. The rapid growth of OTT platforms, increased focus on animated intellectual property (IP) content and larger investments in VFX by studios has provided animation and VFX studios greater opportunities in both the domestic and international markets. The changes in YouTube advertising policies around kids’ content during FY20, though, has had an adverse impact on the animation IP production segment.

Radio. Overall slowdown and lower central government advertisement spends led to a decline in FY20 revenues, while absence of a robust listenership measurement system continued to challenge players’ ability to grow their advertiser base.

M&E in the COVID-19 era
The M&E sector faced significant disruption with the ongoing lockdown forcing all forms of outdoor entertainment, particularly cinemas and events to shut down and content supply chains to dry up. Additionally, advertising spends also declined as all major advertisement spend sectors were witnessing their own business continuity challenges. With lockdowns easing, the content supply appears to be restarting, albeit with baby steps. Cinemas and events, however, continue to be shut and face significant uncertainty regarding return to normalcy in the near term.

Advertisement spends appear to be recovering and with a strong festive quarter expected in Q3FY21, there is likely to be a quicker recovery in marketing budgets once we start moving towards normalcy. The overall reduction in advertising expenditure, therefore, may turn out to be lower than the contraction in economic activity.

Underlying drivers for sector projections
The M&E sector in India is projected to see a significant decline of 20 percent in total revenues in FY21, with deep cuts in print and films, followed by television, on account of COVID-19 disruption.

M&E sector – Historical performance

Segment size –overall revenues
(
Rs billion)
FY16 FY17 FY18 FY19 FY20 FY20 growth (%) CAGR(%)
Digital and OTT 65 86 121 173 218 26 35
TV 552 596 652 714 778 9 9
Print 288 308 319 333 306 –8 2
Films 137 145 159 183 183 0 8
Animation, VFX, and post-production 53 62 74 88 101 15 18
Gaming 28 32 44 62 90 45 34
Out-of-home 26 29 32 34 31 –9 5
Radio 23 24 26 28 25 –11 2
Music 11 13 14 17 19 15 14
Total 1183 1295 144 1631 1751 7 10
Segment size –overall revenues
(
Rs billion)
FY16 FY17 FY18 FY19 FY20 FY20 growth (%) CAGR (%)
Digital and OTT 65 86 116 160 199 24 32
TV 184 203 224 251 262 4 9
Print 192 204 211 221 198 –10 1
Films (in-cinema ad) 7 8 10 11 11 –7 12
Out-of-home 26 29 32 34 31 –9 5
Radio 23 24 26 28 25 –13 2
Total 497 554 619 705 726 3 10

Segment-wise impact of COVID-19

Segment impact Near term Long term
Digital and OTT video Reallocation of advertising spends away from outdoor M&E and traditional media (print, radio) toward digital.

Increasing propensity to consume OTT video content, especially from Tier-III and below cities likely to emerge.

Low-touch economy will necessitate digital fulfilment for almost every business, with a greater propensity to transact online.

Rural India and smaller towns show an increasing propensity and affinity for the internet.

Television Significant spike in viewership.

Significant decline in ad revenues and a lower decline in subscription revenues seen in FY21.

Content cost renegotiations between broadcasters and producers.

TV Viewership likely to come back to pre-COVID levels.

Long term fundamentals of TV remain robust, with ad and subscription revenues expected to recover in FY22.

Content cost rationalization could be undone partially in the long run.

Films and OOH No theatrical distribution due to continued closure of cinema halls, however there was a spurt in direct to OTT releases.

Filming to see a short-term change, with challenges around higher production costs.

Cinema 2.0: Conceptualization of new projects for the long term.

Realignment of theatrical windows with emphasis on mid to large projects.

OTT releases to be economics driven – primarily smaller budget projects.

Animation and VFX Disruption of animation and VFX operations due to transition to work from home.

Shutdown of small animation and VFX studios likely in the short term.

Reduced pipeline of VFX work on account of films, due to stalled shoots and projects.

Leaner cost structures in animation and VFX studios to emerge.

Animation studios likely to focus on own IP for segments like Gaming, Edtech, etc.

Increased volume of VFX on account of completion of pending projects and shift in outsourcing from China.

M&E sector – Projected performance

Segment size – overall revenues (Rs billion) FY20 FY21P FY22P FY20 growth/
decline (%)
FY22
growth over FY21 (%)
Digital and OTT 218 254 338 17 33
TV 778 708 769 –9 9
Print 306 188 296 –38 57
Films 183 61 182 –67 196
Animation, VFX, and post-production 101 49 77 –51 56
Gaming 90 99 143 10 45
Out-of-home 31 16 28 –49 77
Radio 25 12 17 –50 40
Music 19 14 17 –25 16
Total 1751 1402 1866 –20 33
Segment size – ad
revenues (
Rs billion)
FY20 FY21P FY22P FY20 growth/
decline (%)
FY22 growth
over FY21
Digital and OTT 199 223 292 12 31
TV 262 217 258 –17 19
Print 196 107 186 –46 73
Films 11 4 7 –65 100
Out-of-home 31 16 28 –49 77
Radio 25 12 17 –50 40
Total 726 579 789 –20 36

The digital consumption segments i.e. digital (including OTT video) and online gaming are expected to be silver linings, with digital consumption across the board having seen a significant upswing owing to people working from home. While advertising revenues on digital have been impacted from last year’s hyper-charged growth, the subscription revenues have seen an upswing and could end up at an accelerated new normal once the pandemic subsides. Digital media advertising revenues are projected to overtake TV advertising revenues for the first time in FY21 and will establish new leaderboard rankings.

Assuming the pandemic is under some form of control by the end of FY21 and businesses learn to operate in the new normal, FY22 will likely be a bounce-back year for the sector, with a 33 percent growth projected over FY21. Digital and gaming are projected to continue their strong growth in FY22 as well, with the habit formation around consumption translating into greater monetization. Underlying core themes will continue to play their part with television subscription revenues being constrained due to implementation of NTO 2.0.

India’s digital demography – On an accelerated path
The spread of the COVID-19 pandemic and the ensuing lockdowns imposed to contain the spread of the virus have accelerated the adoption of digital services among a wider base of users in the country.

While the trajectory, composition, and overarching themes of India’s digital demography are consistent even in a post-pandemic reality, KPMG outlined a few of the structural shifts that have occurred in digital consumer behavior over the last few months:

Indoor over outdoor in the near to medium term. Digital technology likely to remain deeply embedded in everyday lives, at least until a safe, reliable, and affordable vaccine for COVID-19 is found as social distancing norms are likely to remain in force till then.

Bharat could lead in defining digital behavior. Rural demand has shown unexpected resilience within weeks of the lifting COVID-19 lockdown alongside an already deepening engagement with the internet for the rural digital consumer. A new homogeneity is foreseen between the various segments and the emergence of a vibrant digital consuming and transacting class from smaller town India.

Less friction in digital payments adoption. The higher level of trust and confidence in going online post the experience of the pandemic is already apparent as more Indians choose cash-less methods of payment. Digital payments are likely to benefit from a whole new range of businesses that will now offer digital fulfilment options.

As a result, age, income, and location will become even less of a barrier to digital adoption and India as a nation is likely see an accelerated transition from passive, video viewers to legitimate digital mainstream consumers. Organizations need to take cognizance of this increased demand from a potentially larger demographic and ensure that their content offerings and supply chains are agile enough to meet the same. Companies would also need to imbibe a digital first thinking across the way they work; whether it be their internal processes or the way they interact with and analyze customer behavior.

Finally, to acquire and retain the value conscious Indian consumer, it is likely that digital ecosystems, which offer multiple use cases under one umbrella, and seek to provide a seamless experience, would emerge as the frontrunners to capitalize on our digital billion.

M&E sector in India – Key overarching themes
NTO 2.0 – another layer of disruption
NTO 1.0 was aimed at creating transparency, encouraging consumer choice, and facilitating systematic growth within the broadcasting and cable services sector. However, following consumer push back due to increased complexity in channel selection and increased prices, TRAI issued a set of amendments in the form of NTO 2.0. These changes focused on increasing consumer choice, promoting a-la-carte selection, but also capped prices of channels and restricted the number of bouquets available. Given the potential adverse impact on economics of broadcasters and distributors, there has been resistance from the TV segment stakeholders.

NTO 1.0 has been legally challenged by the broadcasters and distributors; and NTO 2.0 is likely to be implemented during FY21 and is accordingly reflected in the TV segment projections.

The video content supply chain – Disruption necessitates innovation
Multiple aspects of the current content supply chain processes are manual and require in-person involvement, which leads to inefficiencies in terms of costs and lead times. COVID-19 and the resultant nation-wide lockdown has disrupted the entire process of content creation, necessitating the intervention of technology to get the content to users’ screens. This use of technology is being seen across the value chain, right from the adoption of remote collaboration tools and software for pre- and post-production, to extensive use of cloud infrastructure, and the use of gaming engines to produce content virtually.

While technology adoption is going to present some challenges in terms of investments during the time of a pandemic like skill development and the shift to a digital-first mindset; change in terms of incorporating technology is inevitable. The same, when mature, may also lead to efficiencies across the supply chain in terms of costs savings on physical locations and offices, as well as potentially lower lead times.

Leveraging technology across M&E
Technology innovations are seeing greater integration across media businesses. The following emerging technologies are beginning to see greater traction and use cases across segments and have the potential to disrupt the status quo.

AR/VR. AR helps integrate digital experiences with real world experiences. VR is driving cloud gaming experience to newer levels and helps provide immersive live event experience.

Virtual production. It improves storytelling, gives creativity fillip to the filmmakers and reduces post-production costs. The technology know-how and availability of skilled personnel is currently low and is expected to increase with the increase in technology maturity.

Artificial Intelligence. AI is helping in many segments of the sector – from personalized recommendations to creating content. With established standard control over data governance and privacy, AI could be the driving technology for user engagement in the M&E sector.

Blockchain. Blockchain can provide transparency and security in the M&E sector, which could unlock new revenue streams like pay-per-use content consumption, and strengthen the fight of the sector against piracy and illegal file sharing.

Outlook
The impact of a slowing economy was already being felt in the Indian M&E sector in FY20, but the COVID-19 pandemic has had a severe negative impact on the economy, with most of the sectors contributing to revenues of the M&E sector witnessing a downturn. As a result, deep cuts in revenues are expected at an overall basis in the M&E sector in FY21.

However, the proverbial silver lining has been the acceleration of the Indian digital consumer base and the resultant consumption, which has hit new highs during the lockdown. This is likely to have long term implications on the balance of power between traditional and emerging/digital segments, as well as the emergence of a transaction led digital economy encompassing the masses in India.

While the numbers definitely show that the Indian M&E sector has gone off-script in terms of its growth trajectory, the time is ripe for reflection, recalibration, and a subsequent revival.

Based on A year off script – Time for resilience, a report by KPMG in India.

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